Of firms and nations

In the post-COVID world, the relevance of the work of Williamson and Alesina will only deepen

Within just a few days, economics has lost two leading lights. Oliver Williamson, the Nobel Laureate from the University of California, Berkeley, died at 87 on May 21. This was soon followed by the sudden demise of Alberto Alesina, a Harvard political economist, aged 63. I didn’t have the opportunity to be taught by either of them or to do research with them, but in the little work I do, in understanding how regulation impacts firm behaviour and competitive advantage, and how non-market factors here influence this relationship, Williamson and Alesina keep coming back with their influential work.

The optimal size

Both Williamson and Alesina moved out of the shadows of their advisers over time to carve out their own niche. While this is a noteworthy point in following the scholarly trajectory of both, the other is how between them they spanned two key tenets of an economy. One examined the optimal size of a firm, and the other, the optimal size of a nation. Williamson, in fact, focused his entire body of work on a new unit of analysis. He posited that to understand the optimal size of firms, one needs to focus on transactions and contracts as the unit of analysis. These, he argued, ultimately influences how large or vertically integrated firms became.

Meanwhile, Alesina dealt with the question of what is the optimal size of nations. In his book, The Size of Nations, with his co-author Enrico Spolaore, Alesina argued that the optimal size of a country is determined by a trade-off between the benefits of size and the costs of heterogeneity. In a large country, per capita costs may be low, but the heterogeneous preferences of a large population make it hard to deliver services and formulate policy. Smaller countries may find it easier to respond to citizen preferences in a democratic way.

In a world where there is, both within and among nations, a heterogeneous quality of responses in dealing with COVID-19, and where we have examples from smaller nations like Taiwan, South Korea, Singapore vis-à-vis larger ones like the U.S., Brazil or India, Alesina’s work rings a bell. Williamson’s thoughts, meanwhile, should also resonate with reshaping of bargaining contracts that employees will now strike with employers in the new ‘work from home’ future that firms are venturing into.

Family ties, trust, communism

Both Williamson and Alesina were much more than just about the size of firms and nations. Alesina, for example, in a 2010 article titled “The Power of the Family” examined the role of family ties on economic behaviour. He also ventured into whether Americans and Europeans differ in the relationship between inequality and happiness.

Economies today grapple with rising populism and misinformation. In 2002, Alesina examined who trusts others and found that recent traumatic experiences, past discrimination, economic success and racial mixing impacted trust.

In another 2007 paper titled “Goodbye Lenin (Or not?)”, Alesina examined the role of communism on people’s preferences and found that in Germany after reunification, East Germans were more in favour of state intervention than West Germans. East Germans’ preferences converged towards those of West Germans over two generations. Williamson, meanwhile, deliberated on calculativeness, trust and economic organisation that ultimately related to his pioneering the field of new institutional economics which examines how social and legal norms and rules underlie economic activity and firm organisation.

In a world where globalisation, inequality and technology were impacting, till recently, how nations and firms evolve, Alesina and Williamson left indelible imprints in advancing the fields of political economy and new institutional economics. Our current lives with a pandemic shock are going to further reshape firms and nations tomorrow, and the relevance of Williamson and Alesina tomorrow will only deepen.

Chirantan Chatterjee is a faculty member at IIM Ahmedabad and Visiting Fellow at Hoover Institution, Stanford University